Crash of the Stock Market

What is the Purpose of Stock?

• In exchange for giving up a tiny fraction of control, businesses are given cash to expand.

Stock Market Crash

• Bull Market: long period of rising stock prices

• Bull markets lasts only as long as investors continue putting new money in it.

• By the latter half of 1929, the market was running out of new customers

September 1929

• Professional investors sensed danger and began to sell off their holdings.

• Prices slipped

• Other investors sold shares to pay interest on their brokerage loans

• Prices fell further

Black Tuesday

• Prices took the steepest dive yet

• 16 million shares of stock were sold

• The market lost between $10 billion and $15 billion dollars in value

• Some people lost their whole fortunes

• The crash undermines the economy’s ability to overcome other weaknesses

Financial Collapse

• Because the stock market crashes, the overall financial industry in America collapses

• Remember, in economies all the industries are intertwined

Bank Failures

• By 1929 banks had loaned $6 billion to stock speculators

• When stock values collapsed, banks lost money on their investments, and speculators could not pay back their loans

• Banks suffered serious financial losses, so they drastically cut back on the loans they made

• Now with less credit available, people couldn’t borrow or spend as much money. This put the economy in a recession

• Some banks couldn’t recover from the losses and had to close

• By 1932, nearly 3,500 banks closed (more than ten percent of the nation’s banks)

Run on Banks

• At this time, the government did not insure bank deposits

• So, if a bank collapses, customers (even if the didn’t invest in the stock market) lost their money

• News of bank failures worried Americans

• Bank Run: many people withdraw their money all at the same time

• If too many people withdraw their money, the bank will collapse

Business Failures

• Common attitude now was, “If you didn’t need it, you didn’t buy it.”

• Businesses rely on people buying their product. If people aren’t buying the businesses aren’t going to survive.

• By 1932, at least 30,000 businesses close

• By the end of the Great Depression, 80,000 close

Unemployment

• At the height of the Great Depression, 25% of working people were unemployed.

• We are facing tough times today in our economy, but are unemployment rate is at about 12%.

• Just like today, during the Great Depression, some places were higher in unemployment and some were lower

Steps to Financial Collapse

1. People stop spending

2. Businesses produce less

3. Layoffs/unemployment

4. More people stop spending